QE dispute could test ECB transparency
Publication of central bank minutes comes at awkward time
by David Marsh
Mon 7 Jul 2014
The European Central Bank (ECB) is moving in the direction of Anglo Saxon-style policy transparency – just at the time when the central bank appears to be preparing for confrontation between supporters and opponents of quantitative easing (QE) as a means of warding off European deflation.
As prefigured in a speech in Amsterdam at the end of April, Mario Draghi, the ECB president, announced last week that from January 2015 the ECB will move to the same cycle as the US Federal Reserve by holding monetary policy-making meetings every six weeks rather than monthly as at present.
Breaking with its custom since the ECB was established in June 1998, the bank will publish minutes of its meetings in the same way as the Fed, the Bank of England and the Bank of Japan. This is in spite of persistent fears that, in a multi-country monetary union such as the euro area, issuing accounts of its 24-person governing council deliberations (even though no information is likely to be given of the names of individual members holding certain views) could raise pressures on the ECB’s constituents to act along national lines.
The ECB may run rather quickly into the awkward consequences of publishing minutes. Further disappointing economic news in Europe and the growing likelihood that inflation will remain well below the ECB’s 2% benchmark will keep the issue of large-scale asset purchases on the agenda of euro area policy-makers. This is in spite of earlier hopes from Germany that the issue had been practically buried as a result of an improvement in economic prospects and a looming potential for conflict with US interest rate tightening next year.
German opposition to QE, from both the Bundesbank and the German government, remains as strong as ever, but an underlying majority of the ECB’s 24-member governing council appears to be in favour of the move. Many different aspects – including the nature and volume of public and private sector assets that could be purchased in different members of the euro area – are still under discussion and remain technically as well as politically controversial. These factors will greatly complicate chances of implementation – but they do not rule it out altogether.
The Bundesbank has issued a series of well-publicised warnings against relaxation of Europe’s policy stance of improving competitiveness, implementing structural reforms and bearing down on fiscal deficits. The German fear is that weaker members of the euro area which have greatly benefited from a sharp contraction of borrowing costs over the past two years will be left painfully exposed to a sharp interest rate reversal once US monetary policy starts to move in the direction of overt tightening. This itself could greatly constrain the ECB's own manoeuvring room for reversing the European monetary cycle, a turning point that the Bundesbank believes should not be delayed for political reasons.
The belief is that Janet Yellen, the Fed chairman, in spite of her well-known dovish tendencies, could move quicker than generally supposed in this direction, a feeling reinforced by better-than-expected US jobs data last week.
Jens Weidmann, the Bundesbank president, faced ire from the Italian press last week by publicly criticising, in a speech in Berlin, Mario Renzi, the Italian prime minister, for resisting the European Union’s strictures on public finances and economic reform measures. This follows Weidmann’s complaints a week earlier that France was making insufficient efforts to lower its fiscal deficit.
Weidmann, backed by most of the German economic establishment (but not by the Social Democratic Party, junior partner in Chancellor Angela Merkel’s conservative-led coalition), has called on the ECB council to be ready to raise interest rates on monetary policy grounds. This stance is different to that of Draghi and Yellen, who both take the view that central banks should use macroprudential measures rather than the blunter tool of interest rate increases to temper financial stability concerns.
The Bundesbank’s established opposition to QE including large purchases of euro area government bonds is fully supported by Wolfgang Schäuble, the German finance minister. In addition, Schäuble is sticking to the line that the ECB’s hitherto successful (but unused) Outright Monetary Transactions programme outlined two years ago to guarantee weaker states against the risk of euro break-up will never be implemented, partly because of difficulty on agreeing the degree of economic conditionality for weaker states that would be required by the German parliament.
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